Tax Refund: Break the Paycheck-to-Paycheck Cycle

Tax season is upon us! With tax returns in the mail, so often we see this season as a chance to breathe a sigh of relief, get caught up on bills, and have a little fun.  And then a few months later falling behind again and re-borrowing to cover basic expenses. Can this be the year that cycle gets broken?  Let’s look at ways to use your tax refund to break the paycheck-to-paycheck cycle:

This is always the safe answer.  Having a cushion for emergencies is a good thing, and can help you weather a variety of problems that may crop up in the next few months.  It’s flexible, and can be used whenever and wherever you need.
How to maximize it: Review your monthly budget.  What do you need this savings for?  Are you regularly running short, often needing to draw?  Do you have a planned layoff and you know you’ll need it then to stretch through lean months? Or will you have a big expense coming up that you’ll need/want to save most of the refund?

These are usually some of the highest interest debt that people carry, so paying extra to principle can save you lots over time.  Plus, part of what makes up your credit score is your “balance to limit ratio.”  So if you can drop that maxed out card to under 30% of the limit, you’re doing your score a solid favor.  It also frees up that available credit in case you need it in the future.
How to maximize it: Target cards that are getting fees – meaning they’re overlimit or always late.  That works to get you on a better payment schedule and not always be running behind.  While you can feel a sense of accomplishment getting the smaller balance cards paid down/off first, you’ll actually save more overall by paying high-interest cards first.

SO.  MUCH.  INTEREST.  It can save you hundreds or thousands in interest costs to get these taken care of early.
How to maximize it: These loans usually have high payments for the balance, so getting them paid off early is just good sense.  It frees up a lot of month to month funds to go to other bills once it’s a thing of the past.  (And let it stay a thing of the past.  You’re working to get better solutions for yourself in the future!)  Aim for check cashing loans first, then other personal loans.

If you have a small balance on a loan that’s almost paid off, it can save you a lot of money in the budget to finish it up and free up those monthly funds for other bills or savings.
How to maximize it: Prioritize these debts only if you can completely pay it off or there’s nothing else that needs to be dealt with.

If you have really high winter and summer utilities for example, paying ahead takes some of the bite off those seasonally high bills.  If you have trouble saving money, it can be a sure way to know your most important bills are taken care of, rather than splurging elsewhere and wishing you had an extra couple hundred bucks when that 100 degree summer cooling bill comes in.
How to maximize it: This can be a good option for car insurance, where paying for 6 months or a year at once gives you a discount.  It also gives you a chance to pay off seasonal necessities like taxes on the car.  While it’s not a terrible option for utilities, it may not be the best go-to since there’s better ways to save more if you can be disciplined with a savings account.

It’s far cheaper to pay up front than to put something on credit or, worse, rent-to-own. Getting seasonal work done on your car or home, or buying the summer round of clothes for the family ahead of time during sales are great examples.
How to maximize it: Determine whether it’s something that’s a need (it’s got to happen anyway), a manageable want (you have enough money to do the necessities and still enjoy it),  or an unmanageable want (really can’t afford because that money needs to be apportioned elsewhere).  So long as it’s not the latter, ask the dealer whether they give a discount for paying up-front.  Many do!

Taking a collection to a $0 balance can help your credit score.  It can ease anxiety about bills that may be threatening to seek a judgment or garnishment.  And they may offer a settlement. Meaning, they’ll take less than the full balance owed and still consider the debt taken care of completely.  If paying off collection is essential to meeting other goals (such as home purchase) using a tax refund may be the only time you have the extra funds to take care of these debts.
How to maximize it: Make sure that the funds are not needed for basic expenses or another debt. Also, make sure that paying off the collection is a priority goal for you.  Aim to keep a “paper trail” of any settlement offers and proof of payment just in case.

Try to think of your tax refund as your chance to invest in yourself and the next year (or more) .  Where will give you the best return? What will save you the most money and stress?  If you need help planning how to use your tax refund to match your financial goals, book a FREE Financial Review Session. Our Financial Specialists can discuss the pros and cons of the ways you were thinking of using it. It’s a great chance to talk about what works, what doesn’t. And, to discuss the next steps for positive forward motion with your finances.